The Nexus Between Environmental Regulations, Green Innovation and Environmental Sustainability in Europe: Evidence from a 3SLS Model

Achieving environmental sustainability is a key policy priority, requiring strategies that balance economic growth, innovation, and environmental protection. However, the dynamic relationships between environmental regulation, green innovation, and CO₂ emissions remain underexplored within a unified empirical framework. This study addresses this gap using panel data from 16 European countries over the period 2003–2015. The analysis relies on a system of simultaneous equations estimated via the three-stage least squares (3SLS) method, complemented by panel Granger causality tests following Dumitrescu and Hurlin (2012). The empirical results reveal several key findings: (1) green innovation has a statistically significant negative effect on CO₂ emissions, confirming its role as an effective channel for improving environmental quality; (2) he Environmental Kuznets Curve (EKC) hypothesis is validated, as GDP and its squared term exhibit the expected inverted U-shaped relationship with emissions across specifications; (3) both market-based (MEPS) and non-market-based (NMEPS) environmental policies exert positive and significant effects on green innovation, with stronger impacts observed for market-based instruments; (4) environmental policies influence CO₂ emissions indirectly through innovation, highlighting the importance of transmission channels rather than purely direct effects; (5) panel causality tests reveal heterogeneous and asymmetric interdependencies, with evidence of reverse causality from CO₂ emissions to market-based policies and from innovation to non-market policies, while no direct Granger causality is detected from policies toward innovation or emissions. The results provide relevant implications for policymakers seeking to achieve innovation-driven and low-carbon environmental sustainability in Europe.